The Effects of the Euro on Interest Rate Sensitivity

Abstract:     
Introduction of the euro altered the home currency financing markets for the euro zone firms in an unprecedented way. I study the consequences of the launch of the euro on interest rate sensitivity of the European stock markets, and find that while stock returns in most countries in the Western Europe were negatively correlated with interest rate changes prior to the euro, that correlation has disappeared since 1999. My evidence is consistent with hypothesis that recent growth in European corporate bond markets has enabled firms to better manage their interest rate risk.

Number of Pages in PDF File: 34

Keywords: Interest rate risk, Euro

JEL Classification: F36, G15

working papers series